Huh? Why am I Voting to Modernize the Tax System?

“What is Proposal 14-1 and why am I voting to modernize the tax system?” This might be the response many voters have when they enter the voting booth at the August 5 primary election and confront the one and only statewide ballot question. While a number of voters will prepare in advance by reviewing the actual ballot language and/or consulting CRC’s impartial summary of the proposal, others will be seeing the language for the first time on August 5. For voters reading the ballot language for the first time, it may be difficult to understand; and for some, it may be downright confusing.

Part of the reason for this confusion lies in the unusual method by which the question is appearing on the ballot. The vote serves two distinct purposes; it is the result of a unique combination of 1) the constitutional requirement to get voter approval of a new local tax, and 2) the legislature’s decision to subject a recently passed law to a vote of the people. While legislative referenda have occurred in the past, they are extremely rare. Voter approval of new or increased local taxes occurs frequently at the city, township, and school level; however, Proposal 14-1 represents the first time a statewide vote is required to authorize such a local tax. Below is an explanation of the “why” associated with the question posed above. For a detailed explanation of the substance, or the “what,” behind Proposal 14-1, read CRC’s analysis of Proposal 14-1.

Two Reasons Why a Vote is Required

There are two reasons why voters are being asked to vote on Proposal 14-1. First, the vote is required because of a tax limitation contained in the state constitution. Article IX, Section 31 of the Michigan Constitution requires that any new local tax, or increase to an existing tax, first gain approval from the voters. Section 31 is part of the 1978 Headlee Amendment to the Michigan Constitution and since its adoption, local votes to approve new taxes or increased taxes have been commonplace for local governments, such as cities, townships, schools, etc. However, because of the way the legislature has proposed to modify the state use tax, Proposal 14-1 represents a first-of-its-kind Headlee vote; it is a statewide vote to authorize a local tax.

Public Act 80 is one piece of a package of laws enacted in 2012 and 2014 that is designed to provide substantial personal property tax relief to Michigan businesses. Specifically, Public Act 80 redirects a portion of the state’s current use tax to create a new local tax (note: the combined rate of the two taxes will not exceed the current 6 percent rate), the proceeds of which would be used to reimburse local governments for lost personal property tax revenues. The conversion of a portion of the existing state use tax to a new local tax must comport with the Section 31 constitutional provisions of the Headlee Amendment that require voter approval.

The second reason for the statewide vote is because the legislature has asked the people of the State of Michigan to approve legislation it recently passed. Without this approval, the legislation will not take effect. Article IV, Section 34 of the Michigan Constitution permits the legislature to ask voters to approve legislation via such a referendum. While the legislature could have enacted personal property tax reforms on its own, it has asked voters to weigh in.

Specifically, Proposal 14-1 is a legislative referendum on Public Act 80; however, because the other pieces of legislation needed to implement the personal property tax reforms are “tie-barred” to Public Act 80, the public vote on Public Act 80 effectively serves as a referendum on the entire package of personal property tax reforms. In a nutshell, the legislature is asking voters, via the legislative referendum, to decide the ultimate fate of the 2012/2014 personal property tax reforms. A “yes” vote would enact the package of tax reforms, while a “no” vote would reject all the tax reforms.

Although legislative referenda are allowed by the 1963 Constitution, they are a rare occurrence. Since the adoption of the Constitution, electors have been asked to vote on specific legislation only on 13 occurrences; however, in all but three of the occurrences, voter approval was requested for the state government to issue general obligation long term debt. The issuance of debt is something for which the drafters of the 1963 Constitution thought voters should have a direct say and therefore they required a public vote (Article IX, Section 15). The three previous legislative referenda not dealing with state debt asked voters to approve 1) a proposed income tax rate increase (1980), 2) proposed revisions to public utility rate procedures (1982), and 3) granting exclusive authority for hunting regulations to the Natural Resources Commission.

The Result: Confusing Language

Many people have pointed out that the ballot language (see below) is complex and confusing. This stems, in part, from the fact that the subject material is technical in nature and difficult to comprehend. Another reason for this is because the legislature decided to prescribe the specific ballot question language to be used, bypassing the normal process for crafting language. While nothing in state law prohibits the legislature from doing so, the legislature did not offer precise ballot language for the previous three legislative referenda that did not deal with debt issuance. Instead, in each case, the legislature allowed the language to be drafted through the standard process spelled out in state law regarding proposed amendments to the state constitution or special questions.

Both the Michigan Constitution and the Michigan Election Law (PA 116 of 1954) contain provisions related to the processes, criteria, duties, and responsibilities associated with the development of ballot question language, both for constitutional amendments and special questions such as Proposal 14-1. The Secretary of State is the agent normally responsible for drafting ballot question language. Article XII, Section 2 of the Constitution requires that questions pertaining to proposed constitutional amendments be described in not more than 100 words and “consist of a true and impartial statement of the purpose of the amendment.” Further, Section 485 of the Michigan Election Law states, “The question shall be clearly written using words that have a common everyday meaning to the general public. The language used shall not create prejudice for or against the issue or proposal.”

While the proposal is not a constitutional amendment but rather a special question, the legislature attended to the 100-word limit for constitutional amendment questions when it drafted the Proposal 14-1 language. However, the drafters seem to have paid less attention to the other provisions of the law. For example, the proposal does not mention the main topic of the tax changes, specifically the personal property tax reforms that are at the center of the package of laws tied to the referendum on Public Act 80. While the language discusses the state use tax changes contemplated, it contains nothing about how the personal property tax would be affected.

Also, one phrase in the language could be interpreted to advocate for passage of the proposal, “. . . modernizing the tax system to help small business grow and create jobs in Michigan.” Further, some people have pointed out that this phrase is not entirely clear and vague. It is not clear the phrase comports with the “common everyday meaning” requirement of state law.

Additionally, the language does not make it clear that this is a Headlee vote pursuant to the Michigan Constitution. While the language mentions that the proposal would “reduce” a state tax and “replace” it with a local share of the same tax, it does not reference the constitutional requirement that such a conversion must be approved by the voters.

Finally, the language states that there is a constitutional 6 percent cap on the state use tax. This is incorrect. While there is such a cap on the state sales tax, the use tax is a different tax and no such cap exists. Both taxes consist of two separate pieces; constitutional rates and a statutory rates. The sales tax is comprised of a 4 percent rate, which is established in law within the confines of a 4 percent limitation placed in the Michigan Constitution (Article IX, Section 8), and a 2 percent rate added as part of the Proposal A school finance reforms in 1994. The Constitution states that the additional 2 percent tax “shall be imposed.” Thus, the legislature must impose a sales tax at a rate at least equal to 2 percent, but no more than 6 percent under the Constitution.

The use tax is comprised of a statutory 4 percent rate, and, similar to the sales tax, a constitutional 2 percent rate. While the total use tax rate is currently set at 6 percent to mirror the sales tax, there is no maximum cap on the tax rate like there is for the sales tax. The 2 percent use tax rate was added as part of Proposal A and must be levied by the legislature. The Use Tax Act (Public Act 94 of 1937) authorizes the additional 4 percent rate, but the legislature could increase this without violating the Constitution.

Summary

Through Proposal 14-1, voters are being asked to approve major tax policy changes for the entire state. This proposal is on the ballot because the legislature, while within its authority to enact these changes on its own, has deferred responsibility for such statutory changes to the citizens of Michigan through a legislative referendum. The proposal also serves a second purpose. Ultimately, voters must approve, or reject, new local taxes as required under the Headlee Amendment to the Michigan Constitution and the new use tax will be levied and revenues distributed by a special authority created as a unit of local government. The 1963 Constitution provides citizens with avenues for direct democracy (e.g., initiative and referendum) and the ability to control the size of government through certain tax limitations (e.g., Headlee Amendment). Proposal 14-1 encapsulates a rare opportunity for voters to do both at the same time; however, the ballot language is likely to confuse many voters. This confusion stems, in part, from the complex nature of the subject material but also because the legislature drafted specific language instead of allowing the Secretary of State to draft the language as has happened with all other statewide ballot questions.

PROPOSAL 14-1

APPROVAL OR DISAPPROVAL OF AMENDATORY ACT TO REDUCE STATE USE TAX AND REPLACE WITH A LOCAL COMMUNITY STABILIZATION SHARE TO MODERNIZE THE TAX SYSTEM TO HELP SMALL BUSINESSES GROW AND CREATE JOBS

The amendatory act adopted by the Legislature would:

1. Reduce the state use tax and replace with a local community stabilization share of the tax for the purpose of modernizing the tax system to help small businesses grow and create jobs in Michigan.

2. Require Local Community Stabilization Authority to provide revenue to local governments dedicated for local purposes, including police safety, fire protection, and ambulance emergency services.

3. Increase portion of state use tax dedicated for aid to local school districts.